Compensation for Sterilization of the Profit Earning Source is a Capital Receipt and not Liable to Tax: ITAT [Read Order]

The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the amount of compensation received by the assesse for sterilization of the profit earning source is a capital receipt is not chargeable to tax in the hands of the assesse

The appellant, M/s Khevana Securities and Finstock Ltd. is a company dealing in shares and securities. M/s Jasani Reality Pvt. Ltd (JRPL) and M/s Emgeen Holding Pvt. Ltd entered into agreement dated 28-10-2005 to develop a property located in Goregaon, Mumbai. In the year 2010 JRPL decided to sell its part of share of property to the assesse. Accordingly there was entered an agreement dated 23-08-2010 with assesse company for Rs. 63 crore and assesse company made down payment of Rs. 6,30,000/-. Subsequently the assesse and JRPL entered into relinquishment agreement dated 16-12-2010. It was decided that the JRPL will pay Rs. 40 crore to the assesse and also return the down payment to the assesse in lieu of relinquishment of right in property. As per relinquishment agreement all payment dues were to be paid before 15-01-2011. The assesse got payment in following manner

(a) Cheque of Rs, 2.5 crdurung the year i.e. F.Y. 2010-11

(b) Cheque of Rs. 2 crore in F.Y. 2011-12

(c) 3,55,000 share of M/s Jasani Reality @ 1000 having Face value of Rs.10 and premium of Rs. 990 on 09-09-2011

Subsequently the assesse sold share of JRPL to M/s Corora Investment Pvt. Ltd. @ Rs. 11 i.e for Rs. 39,05,000/. Accordingly the assesse claimed that actual benefit derived by it in the transaction is of Rs. 4,89,05,000 (2.5 cr + 2 cr + 39.05 lakh) only but mistakenly shown 4,83,05,000/-. The assesse treated such liquidated damages in its books of accounts as capital receipt not chargeable to tax. It was submitted by the assesse that its main business as recorded in the MOA is dealing in shares and securities and therefore such liquidated damages does not represent business receipts.

However the AO being dissatisfied with the submission of the assesse held that the amount of compensation received for Rs. 40 crores by the assesse represents the business transaction and therefore the same cannot be treated as capital receipt. Likewise, the income has accrued in the year under consideration as the relinquishment deed was signed dated 16th December 2010 in the year under dispute corresponding to assessment year 2011-12. Thus, the AO made the addition of Rs.40 crores to the total income of the assesse. Aggrieved assesse preferred an appeal to the CIT (A). CIT (A) rejected the contention of the assesse and confirmed the order of the AO. Being aggrieved by the order of the learned CIT (A), the assesse is in appeal before ITAT.

The Coram of Before Sri Mahavir Prasad, Judicial Member and Sri Waseem Ahmed, Accountant Member while restoring this issue to the file of the AO for fresh adjudication as per the provisions of law held that “it appears that the assesse has received the compensation which is not chargeable to tax in the light of the principles laid down by the honorable Supreme Court in the  CIT vs. Saurastra Cement Ltd reported in 325 ITR 422 case– it was held by the Supreme Court that

“that the compensation paid amounted to sterilization of the capital asset of the assesse, as the supplier failed to supply plant as stipulated in the agreement and clause 6 thereof came into play. The aforesaid amount received by the assesse towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, was a capital receipt not liable to tax in the hands of the company”.Accordingly we hold that, the amount of compensation received by the assesse is not chargeable to tax in the hands of the assesse”. Hence the appeal filed by the assesse is partly allowed for the statistical purposes.

To Read the full text of the Order CLICK HERE

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